We show that increased uncertainty about the size of an emerging market's external debt has a nonlinear and potentially large adverse effect on the supply of international credit offered to them. We also show that if international creditors are first- order risk averse, attaching greater weight to utility derived from bad outcomes than from good ones, a moderate increase in uncertainty about debt overhang or about other relevant factors affecting repayment prospects-- can cause the supply of credit to dry up completely. We therefore offer one possible explanation for why emerging markets may find themselves suddenly cut off from international capital markets.
*Published:
Financial Crises in Emerging Markets, Pacific Basin FED Conference Volume, Cambridge: Cambridge University Press, forthcoming.
Aizenman, Joshua A. and Nancy Marion. "Reserve Uncertainty And The Supply Of International Credit," Journal of Money, Credit and Banking, 2002, v34(3,Aug), Part 1, 631-649.
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